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After Housing And The Stock Market, Is Higher Education The Next Bubble To Burst?

Few industries today have a worse business model than higher learning institutions.

Simply put, colleges are slowly pricing themselves out of existence. Tuition has consistently increased faster than inflation and household income, to the point that it is now four times more expensive to attend college than it was a generation ago. The result is that the average college senior carries $25,000 in student loans at graduations. The debt can follow students around for years, sometimes to the end of time, literally: $36 billion in loan debt is held by people over 60-years old!

Colleges are now faced with the challenge to the long held belief that a degree is worth the student loan burden because it leads to a lifetime of good paying jobs. However, the recession and the tepid recovery made make this belief more questionable as new evidence points to a much lower lifetime earnings. As a result, last year a whopping 41% of all colleges saw their enrollment fall.

Faced with declining enrollment, many colleges across the country assume that they have a marketing problem and are hiring CMOs to build their brands. However, the lack of branding or coordinating the admissions offices’ sales pitch is not the reason for a shrinking student body. While whitewashing substantive and largely self-inflicted problems with advertising campaigns may be an appealing quick fix, transforming the business model itself would be a better approach – better for the colleges, for students, for the nation as a whole in the long run.

Schools suffer from an administrative bloat, as they are expanding their bureaucracies significantly faster than the numbers of instructors and researchers.

While higher education institutions benefit from hundreds of billions in budget increases every year, most of it goes toward benefiting administrators, not educators. Since the early 1990’s, spending on administration per student increased by 66%, while instructional spending per student rose by 39%.

A big reason that colleges get away with an inefficient model that favors administrators over faculty is that students pay only a fraction of the expense of running a school, despite the oversized increases in tuition. The lion’s share of university resources comes from the federal and state governments, as well as private gifts. These subsidies for higher education fuel the expansion of bureaucracy because the college model lacks transparency.

In fact, the 2010 Goldwater Institute study stated, “universities have in recent years vastly expanded their administrative bureaucracies, while in some cases actually shrinking the numbers of professors.” Less than 40% of students are actually taught by tenured professors, while the majority is taught by assistants, instructors, and adjuncts, directly contradicting the core mission of any university.

With the federal government and states looking for ways to trim their budgets, appropriations to colleges and universities are likely to be scaled back as students and institutions sort through what they want from a university education and how much is it worth. The higher education bubble has been inflating for decades, propagating the myth that heavy student debt burden is justified by high paying jobs. But costs can’t outpace household income forever, and the debt based model is not sustainable as long as administration cost grows exponentially.

Higher education institutions now face pressures similar to those that reshaped other inefficient industries, like the car industry or the airline. Soon it will be colleges day of reckoning as they have to balance the reality of high costs, debt burden and lower degree value.

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Where does one read about “rampant cheating” the only large scale cheating is by Chinese trying to get into our colleges and high schools. Rampant cheating is true in Europe where higher education is cheap or free and less appreciated all around.

I’d put much of the blame on for-profit institutions that answer to shareholders & not students. They take on anyone, claiming that that is a good reason to attend their school, and get students to sign off on loans even when they know the student isn’t likely to finish the semester let alone 4 years.

I agree with David. For-profit institutions really deserved a larger focus in an article like this. In addition to students not finishing & winding up with debt… even if they do finish at some of these for-profit colleges – their degrees are worthless because the education was worthless, and employers know this.

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I have been a faculty member, department chair, dean, and administrator for 35 years at two private colleges, and counting my own undergraduate and graduate experiences, have been “in” higher education for 45 years. Several things about this piece: first, almost nothing in it is new; second, it treats higher education as though it is monolithic, overlooking the fact that there are more than 4000 colleges and universities in the US, whose funding sources are extraordinarily varied; third, its focus on a business model of “administrators over faculty” overgeneralizes in two respects: it regards “tenured professors” as the gold standard, instead of recognizing the validity of changing models of faculty employment and differing purposes for institutions that determine the nature of faculty employment, and second, it again fails to recognize that most institutions in the US are tuition driven, not the recipients of federal and state resources. Declining enrollments are not “simply” the result of increased tuition, but significant demographic changes in the US, including a downturn twenty years ago in the number of children from the “traditional” demographic, white middle-class families; the fastest-growing youth demographic, for instance, comes from families of color who have no heritage of higher education. Finally, the growth in higher education expenses reflects a sixty-year growth of higher education _facilities_ as campuses have been established and matured; some of those facilities increases may have been merited by purpose, while some are clearly the result of someone’s vanity. Regardless, they have to be maintained. As Odysseus remarks in Book XIX, “Iron of itself draws a man toward it”; once you build something, the temptation to put a program in there, staff it, recruit for it, and maintain it even if it’s a financial black hole is very strong.

Without necessarily disputing the larger thesis, there are at least some flaws in how the data is used here to support the thesis.

As just case in point, he suggests (as have other mainstream media articles, to be fair) that borrowers over 60 reflect years of repayment, with the assumption that these are people who borrowed at 20, and are still repaying 40 years later.

But the studies the Fed has done generally have pointed towards the surge being in large part caused by more older students (50+) returning to school for job retraining or advanced degrees, and not surprisingly still owing a short time after.

(You can at least see some surface level data at http://www.newyorkfed.org/studentloandebt/ though it doesn’t dig into cause).

Now, that’s not to say this trend doesn’t have consequences as well, among them that loans are forgiven upon death/disability, so these loans may in many cases won’t be repaid, and the loan system could certainly be exploited in certain cases by savvy individuals. That’s a valid concern.

But it’s misleading to suggest that the average borrower will toil in repayment for 40+ years. I don’t think that’s a reasonable conclusion from the data.